For several years there has been a move to narrow or potentially eliminate non-compete clauses in employment contracts. Various states have imposed a variety of limitations including prohibiting the process of blue lining (amending a contract if some portion is found to be unenforceable) to, in some instances, prohibiting non-competes in their entirety.

In Iowa, non-competes have been considered to be generally enforceable so long as the terms of the non-compete are reasonable and there is no significant public policy that would be violated by the non-compete. Iowa has, in certain circumstances, seen non-competes overturned by the courts, such as in medically underserved rural areas where a non-compete for mental health providers or other specialty providers has been deemed to limit accessible care. In the last legislative session, Iowa amended Iowa Code 135Q to provide that healthcare staffing agencies for persons such as registered nurses and certified nurse aides were no longer able to include non-competes in the staffing agreements.  This change essentially bans non-competes in healthcare staffing agencies for the majority of employees. 

Non-Competes in Iowa

Iowa has been somewhat more conservative in how it viewed non-competes than the national trend as noted in our 2021 article, “Small Business Impact on the Promoting Competition Executive Order.”  The Executive Order “promoting competition in the American economy” directed federal agencies, including the FTC, to create frameworks to support competition. One significant area was either the regulation or potential elimination of non-competes.  This order directed various federal agencies to assess any and all initiatives which could benefit small businesses, farmers, and others by creating “more choices among suppliers and major buyers leading to more take home income which they could reinvest in their enterprises.” 

New Proposed Non-Compete Rules

On January 5, 2023, the Federal Trade Commission (FTC) proposed new rules to amend Title 16 of the Code of Federal Regulations to prohibit non-compete clauses in most employment contracts. The proposed rules specifically state that clauses that act as de facto non-competes are also prohibited. The proposed rule states, “A de facto non-compete is any requirement that has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”  

Note that the term “worker” as used in this proposed rule includes independent contractors, interns, volunteers, and others we might not normally consider employees, making the coverage of this rule extremely broad.

The FTC goes on to cite some examples of these de facto non-compete clauses including broad non-disclosure agreements and the requirement of training costs reimbursement if employment terminates (although it may be noted that this already closely tracks DOL expectations and requirements in this area).

The proposed rule also requires the recission of preexisting agreements and states that it has primacy over any state law which would be contrary to its requirements.  Once in effect, it places an affirmative obligation on the employer to provide notice to workers that non-compete clauses in contracts have been rescinded.

This obligation would require “individualized communication,” which likely means a letter or similar communication directed to each worker, although it does allow for paper or digital notice. Unlike many agency rules, it specifically indicates that a text message is sufficient. However, if this rule goes into effect, it will be incumbent upon the employer to keep appropriate notifications, listings, and other items to demonstrate that notice has been provided. Notices should follow the model language contained in 910.2(2)(C).

The only exception noted to this rule is Section 910.3, which states this will not apply to non-compete clauses related to the sale of a business entity. In other words, if an owner is selling a business, traditional non-compete clauses that do not allow a substantial owner to then go out and develop a competing business, would be allowable although still subject to federal antitrust law. A substantial owner is defined within the rule as a person who owns at least 25% of the business entity being sold.

The notice of proposed rulemaking is open for comment for 60 days and the rule itself would come into effect 180 days after the publication of the final rule. Sweeping rule changes of this type will very likely be challenged by various industry groups so contentious litigation is expected.

It does not currently appear that the rule would be retroactive so any impact on pending litigation is unclear and depends on state standards.

The Big Picture

Employers in Iowa have faced consistent challenges to non-competition agreements over the last several years. Given this pressure, as well as national trends, it is important for employers to evaluate their existing non-compete agreements, focus on areas that are unlikely to be subject to additional federal control, as well as assess the applicability of other laws which may range from HIPAA/HITECH, the Red Flag rules, GDPR, and intellectual property requirements, as well as industry-specific privacy and confidentiality standards. Careful planning now may assist businesses if this rule is enacted.